‘It’s the End of the World as We Know It’ (and I Don’t Feel Fine)

The world’s attention is focused on events in Ukraine, where Russia’s unprovoked and unjustifiable invasion of the country has been met by the Ukrainian people’s heroic efforts to defend their homeland against a ruthless superior force. Regardless of the immediate outcome of the war, thousands of people will die, many more will be displaced, and the global economy will be severely disrupted, all to feed the ego of one man unable to break away from his tortured interpretation of the past.

The conflict has deep roots. Stalin’s collectivization of farms in the Soviet Union caused famine that killed thousands of Ukrainians and led some of them—not the majority—to support Germany in World War II, because they viewed Hitler as a lesser evil than Stalin (hence Putin’s reference to “neo-Nazis” running Ukraine). For most Ukrainians and Russians, particularly those born after the Soviet Union’s collapse, this is ancient history, not to be forgotten, but also not to be acted upon. Putin, however, is intent on redressing old grievances and restoring Russia to the position of great power dominance he thinks it deserves. So, here we are.

As with all conflicts, large or small, there is collateral damage, and this time it is large. In the space of a few days, Putin has swept away the international system the West painfully constructed after World War II and maintained for 75 years and has taken us back to old-fashioned power politics, where might makes right and rules don’t matter. If Ukraine does not turn out to be his “last territorial demand”—and I think it will not (watch out Moldova, you’re next)—he will become a twenty-first-century version of Hitler, gobbling up his former Soviet neighbors who have enjoyed 30 years of freedom.

The consequences could be significant. War produces panic, which produces price spikes and shortages caused by supply chain disruptions and hoarding. We have experienced a good bit of that recently because of Covid, and we may well now have more as markets adjust to changed circumstances. While Russia represents only between 1 and 2 percent of the global economy, it is a significant supplier of some critical metals like uranium and titanium and a major exporter of oil and gas to Europe. The latter, of course, creates opportunities for U.S. oil and gas producers as western Europe accelerates its move away from dependence on Russia.

The biggest impact will come from the sanctions the United States and its allies are imposing. Sanctions have the best chance of achieving their goals when they are multilateral, which reduces possibilities for leakage in or out, but even then they are often like putting a lobster into a pot of cold water and slowly turning up the heat, as opposed to dropping it into a pot of boiling water. Either way, the lobster dies, but the first way takes a lot longer, and so it usually is with sanctions.

That may not be true this time, however. Putin has made substantial efforts to insulate the Russian economy. Government reserves are up, and dollar reserves are significantly down. Russia is holding gold at record levels, but if its banks are removed from SWIFT and its assets held in Western institutions frozen, it will be increasingly difficult for the government to finance its activities. The sharp decline in the ruble’s value will also lead to panic buying and hoarding in Russia, which will undermine support for the war, although in an increasingly authoritarian state, that may not make much of a difference. I assume they are stockpiling critical military materials. That means denying them critical items like semiconductors will eventually cripple a lot of their machinery, but not this week or this month.

Sanctions may also be tough on people outside Russia, particularly in Europe if Putin decides to retaliate. Here in the United States, we should expect more cyber intrusions from Russian hackers, difficulties in acquiring a few key materials, and uncertainty in our financial sector as banks freeze assets and block transactions in an effort to comply. You know there will be a plant somewhere that will close because its business with Russia has been interrupted, and you know there will be a story in the media about it. But that illustrates another truth about sanctions—if you want them to bite the enemy, you must accept that they will bite us as well. The question, as always, is whether the juice is worth the squeeze. Right now it seems that it is, and it has been heartening to see a growing number of companies so quickly taking the initiative to end their economic relations with Russia. That may not deter Putin, but it will have a lasting impact on the Russian economy.

Beyond economic chaos, however, we must also recognize the systemic disruption Russia is causing. The biggest tragedy is the abandonment of a system of rules and order, a return to power politics, and the resurgence of authoritarianism—behavior we have spent 75 years trying to eliminate. While the Ukrainians are the immediate losers, in the long run all of us will lose.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. 

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